TAXABILITY OF CORPORATE GUARANTEE POST INSERTION OF SUB RULE 2 OF RULE 28 OF CGST RULES,2017

[Brajesh Agrawal]

In the GST regime, any services between related persons in the course or furtherance of business, qualifies as a ‘supply’ leviable to GST, even without any consideration as stipulated in schedule I of CGST Act, 2017.

Further, persons are deemed to be “related persons” if inter alia, any person directly/indirectly owns, controls or holds 25% or more of the outstanding voting stock/shares of both of them, if one of them directly/indirectly controls the other, or if both of them are directly/indirectly controlled by a third person as provided in explanation to section 15 of CGST Act,2017.

Consequently, as per GST law, the act of issuing a corporate guarantee by a parent or holding company is regarded as a taxable supply, even in instances where no consideration is involved.

Nonetheless, according to a particular perspective, the guarantee contract does not signify a direct contract between the surety (the entity issuing the guarantee) and the principal debtor (the borrower), but rather it represents a contract between the surety and the lender, both of whom are independent entities. Consequently, it can be argued that this arrangement does not meet the criteria to be considered as a supply of services from the surety to the principal debtor. Therefore, it follows that GST, being a levy based on contractual agreements, cannot be applied to such arrangements. However, this argument is still to be tested before the court of law.

In cases where the transaction is deemed as a supply, the approach for assessing the value of such transactions is crucial for determining the GST liability and has been a contentious issue between the department and the assesses. Nevertheless, the introduction of sub-rule 2 in rule 28 of the CGST Rules 2017 is anticipated to bring about a resolution to this matter.

Circular No. 34/8/2018-GST dated 01.03.2018, the Central Board of Indirect Taxes and Customs (CBIC) clarified that services provided by the Central or State Government to any business entity, including Public Sector Undertakings (PSUs), in the form of guaranteeing loans acquired from financial institutions, in exchange for remuneration, are subject to taxation.

However, subsequently, the Government granted an exemption pertaining to such services provided by the Central/State/Union Territory Government to their undertakings or PSUs. Despite the exemption from GST, the Government continues to categorize the act of guaranteeing a loan as a 'supply' from inception of GST.

• Valuation of service of issuance of corporate guarantee for levy GST:

FROM 01.07.2017 UNTIL 25.10.2023

W.E.F. 26.10.2023

Open market value or value of supplies of like kind and quality of services (rule 28 of CGST Rules,2017) except   Where full ITC is available to the recipient, ‘any value (even zero value)’ declared in the invoice can be deemed to be the open market value of the supply in such cases, in terms of the second proviso to Rule 28(1) (So, the benefit of zero value is not available where guarantee has been issued for the entities dealing in exempt supply.)

-1% of amount of such guarantee                         OR        - actual consideration             Whichever is higher (As per newly inserted sub rule 2 of rule 28 to CGST rules 2017)

• Following points are still pending to be clarified from the GST department:

• Can the issue of corporate guarantee be termed as continuous supply of services under GST and needed to be paid monthly, annually or in any other frequency? Or GST needed to be discharged only at the time of issue of guarantee (i.e., only one time irrespective of the tenure of guarantee, say 10 years).

• Applicability of this change on existing guarantees which has tenure of more than 1 year.

• Whether corporate guarantee will include letter of commitment, letter of comfort etc., issued for securing borrowings of related party.

• Whether value of corporate guarantee can be restricted to actual loan amount. (As if guarantee is of 100 cr. however, drawdown happened for 60 cr. only)

• Whether authorities can demand GST for past period treating 1% or higher % as open market value of guarantees issued for related parties where the recipient is not eligible to full ITC.

• To do list for corporate entities:

• To restructure the modality of providing corporate guarantees between group companies etc., where related parties exist.

• To evaluate their tax position when reviewing or renewing such corporate guarantees. Taking into the consideration the loan amount to be taken by related parties and basis which issue corporate guarantee

• To assess their tax position during the review or renewal of corporate guarantees, companies should consider various factors, including the loan amount sought by the related parties.

• To identify the periodicity of payments on such corporate guarantees to identify time of supply for the purposes of timing of remittance of GST.

• The corporate guarantees to be provided to foreign subsidiaries without consideration will fail to qualify as export of services as the existence of payment in foreign currency is not fulfilled.

------

Brajesh Agrawal

Head Strategic Initiatives IDT- GMR Group